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IMF Staff Completes 2017 Article IV Mission to Algeria

March 20, 2017

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

Efforts to adjust to the oil price shock are underway. The authorities achieved a notable reduction in the fiscal deficit in 2016 and are seeking to reshape the country’s growth model.

Fiscal consolidation will need to be sustained as oil prices are expected to remain low.

An International Monetary Fund (IMF) staff team led by Jean-François
Dauphin visited Algiers from March 7 to 20 to hold discussions for the 2017
Article IV consultation. Discussions focused on the appropriate mix of
policies to adjust to lower oil prices. At the conclusion of the mission,
Mr. Dauphin made the following statement:

“Algeria continues to face important challenges posed by lower oil prices.
Overall economic activity was resilient, but growth in the nonhydrocarbon
sector slowed under the effects of spending cuts and is estimated at 3.4
percent in 2016. Inflation increased from 4.8 percent in 2015 to 6.4
percent in 2016 and stood at 8.1 percent year-on-year in January 2017.
Unemployment increased to 10.5 percent in September 2016 and remains
particularly high among the youth (26.7 percent) and women (20.1 percent).
Despite some fiscal consolidation in 2016, the fiscal and current account
deficits remained large, and public debt increased. International reserves,
while still ample, fell by US$30 billion to US$113 billion (excluding
SDRs).

“Efforts to adjust to the oil price shock are underway. The authorities
achieved a notable reduction in the fiscal deficit in 2016 and have adopted
an ambitious fiscal consolidation plan for 2017-19. They made progress
improving the business environment and are working on a long-term strategy
to reshape the country’s growth model to foster greater private sector
activity and economic diversification. The central bank is adapting its
monetary policy instruments to a tighter liquidity environment. This
growing reform momentum is welcome.

“A key challenge at this juncture is choosing a policy mix that will help
the economy adjust to the oil price shock in a way that is sustainable and
the least costly in terms of growth and employment.

“Fiscal consolidation will need to be sustained as oil prices are expected
to remain low and hydrocarbon reserves are exhaustible. At this stage, the
consolidation should rely primarily on broadening the tax base, including
through better tax enforcement and the rationalization of tax exemptions;
containing current spending; gradually replacing costly energy subsidies,
which mostly benefit the well-off, by direct support to the population most
in need; and improving the efficiency of capital spending and reducing its
cost. Investment in health, education, and well-targeted social safety nets
should be preserved. These efforts should be supported by further
strengthening the budget framework and closely monitoring growing fiscal
risks.

“Too abrupt a fiscal deficit reduction, however, should be avoided to
reduce the risk of a sharp slowdown in growth. In the mission’s view, given
the relatively low level of public debt, Algeria could afford a somewhat
more gradual fiscal consolidation than entailed in the current medium-term
budget framework if it were to consider a broader range of financing
options, including external borrowing and the sale of state assets.

“The mission strongly supports the authorities’ objective to decrease the
economy’s dependence on hydrocarbons and unleash the potential of the
private sector. This is not only needed to adjust to lower oil prices but
also to ensure a sustainable source of job creation even beyond the horizon
for proven oil and gas reserves. Achieving this goal will require
wide-ranging structural reforms. Measures are needed to improve the
business environment and access to finance, strengthen governance and
transparency, make the labor market more effective, ensure that skills
produced by the education system and sought by students match the needs of
employers, foster greater female participation in the labor market, and
further open the economy to foreign investment. The overall strategy should
be designed and sequenced so that reforms reinforce each other and the
burden of economic adjustment is shared equitably. Action should be timely
as structural reforms take time to bear fruit.

“Exchange rate, monetary, and financial policies should support the
adjustment. Further efforts to bring the dinar in line with fundamentals,
combined with steps toward the elimination of the parallel foreign exchange
market, would support fiscal and external adjustment. The Bank of Algeria
is appropriately introducing open market operations, which should become
its main monetary policy tool. The Bank of Algeria will need to stand ready
to tighten monetary policy in light of growing inflationary pressures.
Based on preliminary data, the banking sector as a whole remains adequately
capitalized and profitable, but the oil price shock has increased
liquidity, interest rate, and credit risks. It is therefore important to
accelerate the transition to a risk-based supervisory framework, enhance
the role of macro-prudential policy, strengthen the governance of public
banks, and develop a crisis resolution framework.

“The IMF team met with Finance Minister Hadji Baba Ammi; Industry and Mines
Minister Abdessalem Bouchouareb; Acting Trade Minister and Housing and
Urban Development Minister Abdelmadjid Tebboune; Education Minister Nouria
Benghebrit; Labor, Employment, and Social Security Minister Mohamed El
Ghazi and the Governor of the Bank of Algeria, Mohamed Loukal. The mission
also held discussions with other senior government and central bank
officials as well as with representatives of the economic and financial
sectors and civil society.

“The IMF team would like to thank the authorities and other interlocutors
for their warm hospitality, cooperation, and candid exchange of views.”